This week, please read the continuing case at the end of Chapters 10 and 11 in your textbook.

After studying the Chapter 10 case, respond to the following:

1. What cash flows does the board need to consider? Prepare a schedule that lays out the cash flow estimates.

After studying the Chapter 11 case, respond to the following:

1. Should PCI lease or buy, assuming a cost of capital of 4 percent? 6 percent? 8 percent

what region of Africa does the temperature stays unchanged throughout the year

 

 

American Guitar Company manufactures two different high quality acoustic guitars for retailers: beginner model and professional model. The company has two service departments: the maintenance department and the power department, and two manufacturing departments: the construction department and the finishing department. American Guitar chooses the reciprocal method to allocate service department costs. It uses operation costing to assign direct materials and conversion costs to its products, and absorption costing with normal costs for external reporting purposes.

In the Construction Department, the wooden guitars are built by highly skilled craftsmen and coated with several layers of lacquer. Then the units are transferred to the Finishing Department, where the bridge of the guitar is attached and the strings are installed. The guitars also are tuned and inspected in the Finishing Department[1]. American Guitar estimates to have an annual practical capacity of 6000 guitars (1500 units of professional model and 4500 units of beginner model). The budgeted sales for 2013 are 1300 units professional model and 4300 units of beginner model. The diagram below depicts the manufacturing process.

 

The following historical information has been collected from American Guitar’s accounting information systems:

	2009	2010	2011	2012
Annual sales	4146(B) & 1611(P)	4456(B) & 1256(P)	4668(B) & 1322(P)	4075(B) & 1300(P)
July sales	393(B) & 183(P)	398(B) & 163(P)	405(B) & 168(P)	372(B) & 155(P)

 

2012	Total Overhead ($)	Total DLH of the two manufacturing departments[2]
January	134,000	2,210
February	137,000	2,280
March	148,000	2,510
April	155,000	2,790
May	157,000	2,980
June	165,000	3,590
July	169,000	3,490
August	168,000	3,030
September	163,000	3,040
October	157,000	3,380
November	139,000	2,420
December	133,000	2,100
Total	1,825,000	33,820

 American Guitar’s direct[3] and indirect MOH costs for the two service and two manufacturing departments in 2012:

	Power Department[4]	Maintenance Department[5]	Construction Department	Finishing Department	Total Amount
Labor-hours	2022	2032	18950	14870	37,874
Kilowatt-hours	2,000	7,000	40,800	30,200	80,000
Maintenance hours	140	60	800	1,000	2,000
Direct fixed costs	$60,000	$36,000	$480,000	$432,000	$1,008,000
Direct variable costs	$58,000	$40,000	$346,800	$358,200	$803,000
Indirect fixed costs					$9,600
Indirect variable costs					$4,400

American Guitar does not expect significant changes in its manufacturing costs in 2013.

 

At the end of June 2013, the balance in American Guitar’s Materials Inventory account, which included 150 pounds of grade A veneered wood, was $2,640; the balance in the finished-goods inventory, which was valuated using the last-in, first-out (LIFO) method, consisted of 2 models, was $16,600.

	Quantity and Unit Cost
Beginner model	20 units @ $430 each
Professional model	10 units @ $800 each

 

The following pertains to the month of July.

 

1. There were no beginning inventories in both manufacturing departments.
2. American Guitar’s work-in-process inventory on July 31 consisted of two jobs: B0642 and P0642. The ending WIP inventories at the finishing department for B0642 and P0642 have 10 EU and 6 EU respectively.
3. Additions to and requisitions from the materials inventory during the month of July included the following.

	Raw Materials	Purchased Parts
Additions	550 pounds of grade A veneered wood for $9,680 3300 pounds of grade B veneered wood  for $41,580	100 set of premium bridges and strings for $1,840 400 set of regular bridges and strings for $6,560
Requisitions
Job B0639 (120 beginner units)	936 pounds of grade B wood	125 regular sets
Job B0640 (100 beginner units)	790 pounds of grade B wood	103 regular sets
Job B0641 (150 beginner units)	1170 pounds of grade B wood	153 regular sets
Job B0642 (15 beginner units)	118 pounds of grade B wood	10 regular sets
Job P0640 (30 professional units)	240 pounds of grade A wood	31 premium sets
Job P0641 (35 professional units)	273 pounds of grade A wood	32 premium sets
Job P0642 (10 professional units)	82 pounds of grade A wood	6 premium sets

 

1. The average hourly rate for the construction and finishing departments in July was $15 and $14 respectively. The total payroll taxes and fringe benefits rate for American Guitar was 40% of wages paid. The July labor hours consisted of the following:

Account	Construction Department	Finishing Department
Job B0639 (120 beginner units)	350	264
Job B0640 (100 beginner units)	302	200
Job B0641 (150 beginner units)	448	285
Job B0642 (15 beginner units)	40	17
Job P0640 (30 professional units)	150	144
Job P0641 (35 professional units)	173	176
Job P0642 (10 professional units)	52	22

 

5.       372 beginner models & 70 professional models were sold on account for $600 (beginner model) & $960 (professional model) each. The finished-goods inventory is valuated using LIFO method.

 

6.       The actual direct fixed costs for power department and maintenance department were $4,050 and $4,000 respectively. The actual direct variable costs for power department and maintenance department were $17,084 and $9,280 respectively.

 

7.       The actual direct fixed costs for construction department and finishing department were $40,100 and $35,800 respectively. The actual direct variable for construction department and finishing department were $33,084.60 and $34,038.40 respectively.

 

8.       Depreciation of the general facility and equipment shared by both manufacturing departments during July amounted to $12,000.

 

9.       Rent paid in cash for warehouse space used by the manufacturing departments during July was $1,200. Utility costs incurred for the warehouse during July amounted to $600. The invoices for these costs were received, but the bills were not paid in July.

 

10.   July property taxes on the general facility were paid in cash, $2,400.

 

11.   The insurance cost covering factory operations for the month of July was $3,100. The insurance policy had been prepaid.

 

12.   The costs of salaries and fringe benefits for sales and administrative personnel paid in cash during July amounted to $8,000.

               

13.   Depreciation on administrative office equipment and space amounted to $4,000.

               

14.   Other selling and administrative expenses paid in cash during July amounted to $35,000.

 

15.   The July 1 balances in selected accounts are as follows:

 

Cash	$138,000
Accounts Receivable	21,000
Prepaid Insurance	5,000
Accumulated Depreciation: Facility & Equipment	102,000
Accounts Payable	13,000

 

Required:

Part 1

Submit a hard copy of your work and email an Excel workbook to support your calculations on or before the due date for questions 1 – 7.

 

1.       What is the predetermined manufacturing overhead rate for external reporting purpose? Is it  the most appropriate rate for managerial accounting? Why?

2.       Prepare the journal entries to record the transactions in July using normal costing.

3.       Calculate the overapplied or underapplied overhead for July. Use the proration method to prepare a journal entry to close this balance.

4.       Prepare a schedule of cost of goods manufactured for July.

5.       Prepare a schedule of cost of goods sold for July.

6.       Prepare an income statement for July.

7.       From the perspective of long-run product pricing, do you recommend American Guitar to keep its absorption costing with normal costs for pricing decision and performance evaluation? Why?

 

Part 2

Submit a hard copy of your work and email an Excel workbook to support your calculations on or before the due date for questions 1 – 11.

 

Recently, American Guitar has faced intense competition from oversea guitars manufacturers. Her competitors sell similar quality guitars averaged 25% less. American Guitar considers implementing the standard costing to improve cost control. After conducting task analysis in the manufacturing departments, American Guitar establishes the following standards:

1)    Each finished guitar contains seven pounds of veneered wood. In addition, one pound of wood is typically wasted in the manufacturing process.

2)    The veneered wood used in the beginner model has a standard price of $12 per pound and the professional model has a standard price of $18. The other parts needed to complete each beginner guitar (professional guitar), such as the bridge and strings, cost $15 ($18) per guitar.

3)    The labor standards[6] for American Guitar’s two manufacturing departments are as follows:

 

	Construction Department	Finishing Department
Beginner model (B)	3 hours of direct labor at $18 per hour	2 hours of direct labor at $20 per hour
Professional model (P)	4 hours of direct labor at $18 per hour	6 hours of direct labor at $20 per hour

 

 

 

 

 

 

 

8.       Assuming American Guitar implements the standard costing, and calculate the followings:

–          Direct material and direct labor variances

–          variable manufacturing overhead variances for both manufacturing departments in July.

–          fixed manufacturing overhead variances for both manufacturing departments in July.

–          standard cost for the beginner model and the professional model.

9.       Prepare the journal entries to record the transactions in July using the standard costing.

10.   Prepare entries to close all the variances using the proration method.

11.   Do you recommend American Guitar to price its products based on its standard costs? Why?

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In 250 words, what role does financial planning play for a competitive firm? It must have two references and be in APA format.